Foreign Investors Dismiss 'Death Spiral' Worries, Continue Buying U.S. Treasuries

Despite fears of a potential "death spiral" in U.S. Treasuries sparked by rising yields, foreign investors are doubling down on their holdings. At the end of October, overseas funds owned $7.33 trillion in long-term U.S. debt—nearly one-third of the total outstanding amount—just shy of the all-time record set in September.

Global Confidence in U.S. Treasuries
The appeal of U.S. Treasuries remains strong for several reasons:
- Yield Advantage: Treasuries offer a much higher yield compared to bonds in markets like Japan and Taiwan.
- Market Liquidity: Australia’s booming pension funds and insurers from Japan continue to increase Treasury investments due to the market's unparalleled depth and stability.
- Global Safe Haven: Amid fiscal instability in Europe, U.S. bonds are perceived as a safer bet.
Naomi Fink, Chief Global Strategist at Nikko Asset Management in Tokyo, noted, “The U.S. Treasury market’s size and liquidity are too entrenched to undermine its role as the central reserve asset.”

Treasury Yields on the Rise
Benchmark 10-year Treasury yields have surged more than 1 percentage point since September, hovering near the key psychological level of 5%, before retreating to 4.65% after softer-than-expected U.S. inflation data.

While higher yields typically reflect rising fiscal risks, global funds are optimistic about the Federal Reserve’s ability to manage any volatility. Analysts also see reassurance in President Donald Trump's nomination of hedge fund manager Scott Bessent as Treasury Secretary, who has pledged to reduce the federal deficit to 3% of GDP by 2028.

Regional Perspectives on Treasuries
- Japan: The country remains the largest foreign holder of Treasuries, with investors capitalizing on both high yields and a stronger U.S. dollar. Japanese funds earned 12% returns on unhedged Treasury investments in 2024, largely due to the dollar’s appreciation.
- Europe: Despite initial concerns over Trump’s economic agenda, European funds are optimistic, betting that the new administration will prioritize maintaining global investor confidence.
- China: Investors view a Treasury meltdown as unlikely. Ming Ming, Chief Economist at Citic Securities, stated, “Even with concerns over U.S. borrowing costs, the Fed has ample tools to stabilize the market if necessary.”

What’s Next?
While Treasuries remain a cornerstone of global portfolios, concerns linger over the growing U.S. deficit, which reached $1.83 trillion in the 2024 fiscal year. As Trump’s policies take shape, foreign funds will likely continue watching for signs of further volatility in the bond market.